Unit 1

BUDGETARY CONTROL
 WHAT IS A BUDGET

A PLAN OF INCOME AND EXPENDITURE

OVER A PERIOD OF TIME
 ACTIVITY 1 TILL 2

A BUDGET IS USED TO

ACTIVITY
MEASURE,

MONITOR,

CONTROL
 ACTIVITY 1
COMMUNICATIONS

Take considerations of factors/elements that

have impact on the company financial
situation
 ACTIVITY 2

ANTICIPATE PROBLEM

Facilitate the managers to make agreement

on assumptions in carrying out respective
activity
 ACTIVITY 3 TILL 7

The role of budget are to

• Plan and Control Activity
• Motivate people
• Set standard to evaluate performance
 ACTIVITY 3

TRADITIONAL APPROACH
TO APPLY BUDGETARY CONTROL

– The Manager Process : Henri Fayol

– Scientific management : Taylor

MAY DEMOTIVATE PEOPLE

 ACTIVITY 4

for effective budgetary control

A BUDGET SHOULD HAVE
Specific
– Clear Objective in Measurable
quantified terms
Attainable
– Clear Communications
Realistics
Time-bound
 ACTIVITY 5

A budget has
a set standard
to measure performance

VARIANCE ANALYSIS
 ACTIVITY 6

VARIANCE ANALYSIS

pinpoints possible causes of

poor performance
or
deviation from the budget
 ACTIVITY 7

4 POSSIBLE CRITERIA TO SET BUDGET

•Use a previous figure
•Set standard using work study method
•Make estimate just to suit firm’s objectives
•Use other people standards

EACH CRITERIA USED

HAVE ITS INHERENT SETBACK
 ACTIVITY 8 and 9

Two key characteristics of a Effective

budgetary control system

• Prepared before the activities start

•Consider the Limiting Factors
 ACTIVITY 8

For budgetary control system

to be effective,
It shall be prepared
before the activities start.
 ACTIVITY 9

In making a budget,
one important factor to consider is the
organisation’s LIMITING FACTOR

Commercial
Organisation: Government, Non-Profiting Org:
Sales available fund
 ACTIVITY 10-11

How to prepare a specific budget

 ACTIVITY 10
1.Prepare budget using quantitative
expression
• Money Value
• Quantity count
• Period or time duration
• Rates

1.Prepare a format to input your information

relevant for the specific budget

2.Start with the limiting factor first and

progressively work until the Master Budget
 ACTIVITY 10-1

A Traditional Flow in preparing budget

1. Sales Budget
2. Operation budget
• Material budget
• Direct Labour budget
• Machinery budget
1. Supporting Schedules
2. Cash Budget
3. Master Budget
 ACTIVITY 11
Prepare a format to input your information
relevant for the specific budget ( see Excel File)
Example: To budget the total value of purchases of an
item within a specific period ( duration of the budget ) =
A X B money value
A= that is what is the quantity that purchasing must buy
(PIECES) =HOW MANY IS NEEDED – WHAT YOU
HAVE IN THE STORE AT THE START + HOW MANY
MUST BE IN THE STORE AFTER THE PRODUCTION
STOPS
B= PURCHASE PRICE per UNIT
 ACTIVITY 12

The format of a purchase of raw material

budget
• Unit used:
• LESS opening stock:
• ADD required closing stock:
• Unit purchased:
• Purchase Value:
 ACTIVITY 13
The format of a cash budget
1. Cash Receipt
2. Cash Payment
3. Surplus/Deficit
4. Opening Balance
5. Loan
6. Repayment
7. Interest
8. Closing Balance ( stipulate a minimum sum)
 ACTIVITY 14
The format of a cash flow forecast ( how much
cash you can have on hand a specific future time.)
1. Cash Receipt
2. Cash Payment
3. Surplus/Deficit
4. Opening Balance
5. Closing Balance
 ACTIVITY 15

a budget and a forecast are NOT the same

• A forecast is merely an information
about the future
• A budget is a management tool for
planning and control .
 ACTIVITY 16

Illustrate how budget

measure, monitor and control
using VARIANCE
 ACTIVITY 17 TILL 23
Illustrate the types of budgets and their relationship

17Format budget for the Limiting Factor( Purchases)

18Cash Flow Forecast
19Format Depreciating Value
20Format P/L Account
21Compare cash budget and P/L account
22Format Budgeted Balance Sheet
23Format Budgeted Cash Flow Statement
 ACTIVITY 24
Format of a Flexible Budget

A flexible budget is created by

adjusting a fixed budget
to allow for the behaviour of costs
at different level of activity
 ACTIVITY 25-26

Applications of
Flexible Budget
Variance Analysis
 ACTIVITY 27 - 28
SUBJECTIVE FACTORS IN BUDGETARY CONTROL
27 SUBJECTED TO INHERENT PROBLEMS:
• Future is predominantly uncetain
• Budget depends on people who can be
unpredictable ( contrary to traditional
management theory )
28 THE BUDGET ITSELF
 ACTIVITY 29
Characteristics of organisation that has a traditional
or scientific management view
1. Clear objectives and activity that can be planned and
controlled
2. Performance can be measured
3. Problem can be solved with the “ best” solution
4. People are seen as “labour factor” organised hierarchically

Such companies are inappropriate for fast moving industries

or those subjected to influences of variations like fashion
or taste. But are appropriate where changes take
place gradually and can be stably projected.
 ACTIVITY 30-32
Explore the effectiveness of
contingency theory to budgetary control.
 ACTIVITY 30
Characteristics of organisation whose management
view is based on contingency theory
1. Response to environment feedback and at the sametime
influences the environment
2. Strive in situations of either uncertain objectives or
uncertain outcome
3. Budgeting system may not seem to work. Rather budget
are based on employee’s judgement of circumstances.
 ACTIVITY 31
Challenges of budgeting in Contingency theory
companies

If results can be certain, budgeting can be use for

personal purposes
If results and objectives are uncertain, budget can
be misused to justify certain courses of actions

Where traditional budgetary concept is

inappropriate, its information can be use for many
other non budgetary-related reasons.
 ACTIVITY 32
For budgetary control to be effective,
it must set to be appropriately people oriented
(according to theory of equity, expectancy, goal setting)
That is: Achievable, Specific, Acceptable

Individual will be demotivated and non committed IF

• Goal is easy: They take it easy. Performance
above budget but not as good as when there is no
budget set.
• Goal is difficult: They give up. Performance is
worse than when there is no budget set
 ACTIVITY 33
For Budgetary control to be effective,
it depend on the organisation culture as reflected by
manager’s assumption about his subordinates.

Theory X: Theory Y:
Budgets are imposed Budget result
and a tool from
to put sanction on
subordinate’s
subordinates. participation
 ACTIVITY 34
3 BROAD CONSIDERTIONS
when implementing Budgetary Control

Organisational culture
Nature of the task
Personality of the worker